The Expert Podcast

Many companies have gone to a subscription service model where, instead of just buying a product, you pay a monthly fee. By buying a product, I mean you'll pay a flat fee upfront and own it. You pay a monthly fee; cell phones have gone to this; some auto manufacturers are going to this; and another company that is famous for this is Twilio. They're a communication software-type company that's gone to a subscription-based model, and the acronym, as you know, is SaaS (Software as a Service). So instead of buying software like Windows or something else, you pay a monthly fee to access it.
Over the last year, Twilio has gone down quite a bit. You see, their stock at one point was over 300; now it's down in the 40s. That's a huge drop from where it was, and we're going to take a look at Twilio as an example of why software as a service or a subscription model may not be the best business model. It may be more advantageous and even more profitable to have a different model.

Look, everybody that's watching this has had some presentation, pitch, or sales offer to you to buy something on subscription. "Newspaper, hey, sign up for a subscription; we'll give you three free months and then give us your credit card; we'll start billing you unless you cancel." And a lot of times, companies that go to a subscription model are thought to be more profitable because you're getting money every month. It's like a revenue stream, and that is true, but there's a huge downside that's often overlooked.

In the short run, it might be good. The downside is that if you are on a subscription model, your sales and development might not be putting money into getting new customers by having a quality product. If you already have a revenue stream, you can kind of sit back a little bit and say, "Hey, our customers must like us because we have this revenue coming in." So yeah, we'll give a few updates, a few tweaks here and there, and they get new customers by throwing money at it, doing marketing, doing advertising to get new customers, and your customer acquisition costs might be one of your highest company line item expenses.

If your acquisition cost is, let's say, six or eight months worth of subscription, you don't break even until you get to about a year, right? So you have to keep that churn from lasting less than a year. Well, what if your churn is about a year old? You're basically just running a break-even company. On the other hand, if you have a company where every month you have to go to your customer and say, "Look, we want to sign you back up for another month; we're going to sell you another package," what's going to happen is that your sales department will be talking to those customers every single month and getting feedback.
Well, we would sign up, but it's too hard to log in, or we do like your product, but we wish it had this. The sales department then goes to management, goes to production operations development, whatever you have, R&D, and makes that product better because you're going to get more direct sales feedback from your customers rather than customers just renewing. Many customers who cancel make that decision months before they actually pull the trigger, but they don't do it because they have better things to do; it's too hard to switch their billing; it's too hard to get a hold of you.

Do you make it easy to cancel? If you're a company that, if you want to cancel, you have to jump through a bunch of hoops, go on a link, call somebody up, and put in a code, sometimes people just say, "Look, I'll pay the 30, 40 a month until I get time to do this," you won't have a chance to resell them then because they've already spent three months churning, the bitterness in them of that they're paying for something they're not using or that they hate. If you have to resell that customer every month, you will get feedback, and you will do what you have to do to have excellence for that customer. You won't have to worry about churn; you'll find out about churn instantly.

What's happening with some of these SaaS companies is that they're finding out that their customers quit a long time ago. It's like quiet quitting; the customer gave up on them months ago, and maybe they even have another replacement service, but they just didn't tell you because it was just too hard to do, and it's automatic billing, so you don't have the chance to up your game with your sales department.
If you put the money into sales versus marketing, now your salespeople are going to be there on the front lines, and you'll get the feedback. Your salesperson will come to you and say, "Man, our product stinks; it's hard for the customer to log in; man, this really is terrible." That will keep your upgrades excellent, and you will retain your customers by voluntary purchasing, not by holding them hostage to a recurring payment. And a lot of these SaaS customer companies are now starting to feel the pain of that, where their retention may have only been from the pain of having to cancel, not from the pleasure of wanting to buy again. And once that's happened, it's too late; you can't fix that problem later.

You can't go back and say, "Oh wait, no, we'll fix it." No, it's too late; they've already spent three months paying for something they're not using and maybe replaced it with something else. So be very careful with software as a service, recurring billing, or even if you're a small retail company, a recurring monthly payment because when people look at their budget and there's inflation and they go to look through what they're going to cancel, people find two or three hundred dollars a month on their credit card bill, and they just cancel that, and then they feel good about it; they don't want to retain those; they've already made the decision.

They got their credit card bill, they highlighted all the things they want to cancel, and they either tell their bookkeeper to cancel them or they do it. That decision's already made; you're not going to resell past that. So don't be a dead weight on a financial statement or on a credit card statement; be a positive benefit to that company. In fact, you want to be something that's not looked at as a business expense. Anything that's a business expense that just costs money gets whacked; it gets deleted. If you are an asset where there's a return on that money, then there's no reason to get rid of you.

If they spend 60 a month for your service but they make 600 a month in sales, that company is not going to be asking how I get rid of 60; they're going to say, "How do I spend 100 and make 10,000?" So you want to be that provider that gives a return on your investment, not just sit back and let the cash register click. Look, it's a lot of fun to watch the sales come in every month when you have recurring billing, when you don't have to do anything; it's like an annuity, but it's really not because that company is expecting